The Philippines: War on red tape to boost FDI

While the Philippines is one of the fastest-growing economies in South-east Asia, the country lags when it comes to foreign investment, particularly when compared to its regional neighbours.

On July 10 the Bangko Sentral ng Pilipinas (BSP) released the latest foreign direct investment (FDI) data, showing a net inflow of $202m for April, up 61.6% on the same month in 2012. Net equity capital inflows accounted for $131m of this figure, with the bulk of these investments coming from traditional sources – the UK, Singapore, Hong Kong and the US – and directed towards the financial, insurance, real estate, manufacturing and mining sectors.

The April result was a significant improvement over March, when for the first time since December 2011, more investments left the country than entered, resulting in a net outflow of $78m. While the positive performance in April boosted the year-to-date total and eased the effect of the March reversal, FDI for the first four months of 2012 was still down 2.8% on the prior year, amounting to $1.51bn.

Nonetheless, the country may still be able to meet the BSP’s FDI 2013 target of $3.2bn for the year, particularly given what the central bank has called a “favourable investment climate on the back of the country’s sound macroeconomic fundamentals.”

The credentials of those fundamentals were given a burnish by the IMF on July 10, when it upgraded its growth forecast for the Philippines economy, lifting its projection to 7% for 2013, up from an earlier estimate of 6%. According to the fund’s resident representative, with domestic demand driving the economy, the country is relatively insulated against external risk. The Philippines is “one of the few emerging markets that could better cope with current global economic conditions”, said the IMF’s Shanaka Peiris.

The projected growth rate for the Philippines is more than twice the 3.1% the IMF has forecast for the global economy this year in its latest outlook report, in which it lowered its estimates for many of the leading regional and international economies. The fund downgraded its forecasts for growth in South-east Asia from 5.9% to 5.6% this year, leaving the Philippines as the only country in the region to have its outlook raised.

Peiris said the Philippine economy was performing well, but it needed to attract higher levels of FDI to boost growth.

Despite its investment-grade status from ratings agencies Standard & Poor’s and Fitch, the Philippines drew only $2.8bn worth of FDI last year, according to a report by the UN Conference on Trade and Development.

That, said the June report, placed the Philippines last among the so-called Asian Six (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam), which attracted a combined $111.3bn in 2012. Singapore led the way with $56.7bn, while Vietnam, at $8.3bn, and the Philippines were at the other end of the list.

The government in Manila has acknowledged it needs to do more to encourage FDI, with a spokesperson for President Benigno Aquino saying that streamlined investment procedures would make the Philippines more competitive.

“We have a big challenge ahead of us because of what we call – in layman’s terms – red tape,” deputy presidential spokesperson Abigail Valte told a press conference at the end of June. “We are encouraging our local government units to streamline their processes and cut the number of their permits so that there will be more business in the country.”

Though plans at the local and national level to streamline bureaucratic processes may help the Philippines attract FDI, it will likely be some time before it is able to challenge some of its neighbours as an investment destination. For that to happen, infrastructure would need to be upgraded and the overall business climate improved, the IMF said in its July 10 report. Until these reforms are enacted, and the promised cuts to red tape made, FDI inflows are likely to rise but not at the same rates as those found in other more investment-friendly South-east Asian countries.

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